Life and Accidental Death Dismemberment
A group life insurance plan provides coverage for a group of employees under a group contract held by the employer. If the plan qualifies under Code Section 79, the cost of the first $50,000 of life insurance is tax free to the employees. Group life insurance is usually set up as term coverage according to one of the following standard policies:
- Flat Benefit Amount
- Salary Schedule
- Class Schedule
Alternative Life Insurance Plans - Carve Out For Executives
Executives covered under a company's group life insurance plan can often obtain better benefits by being removed from the group plan and given separate individual policies provided by the employer. Removing executives from a group plan does not alter the qualified status of the group life plan for the remaining employees.
|
GROUP TERM |
CARVE OUT |
Income tax to employees |
First $50,000 of insurance is income tax free. |
All coverage is taxable at the lower of PS58 rates or insurer's term rate. |
Premium deductibility to the corporation |
Full premium deductibility. |
Depending on the goals of the corporation and the way that the insurance is set up, deductibility varies. |
Cost to corporation |
Increases as group ages. |
Most plans are level premium contracts. |
Non-discrimination coverage requirements |
Section 79 requirements apply. If these are not met, key employees lose $50,000 exemption. |
None. |
Benefit non-discrimination requirements |
Section 79 requirements apply. Generally benefits must be a uniform percentage of compensation for all participants. |
None. Coverage can vary from executive to executive. |
Underwriting |
Possible group underwriting depending on size of group and the benefit is usually guaranteed issue. |
Medically underwritten for each individual. |
Treatment at retirement |
Usually terminates or is reduced sharply due to increasing employer costs. |
Can be continued beyond retirement with no increased employer cost. Employee cost remains equal to the PS58 costs. |
Use of cash value/permanent insurance |
May result in unfavorable taxation to covered employees. |
Enhances plan flexibility. |
